Loudcloud Discovers Market Darwinism

Loudcloud announced this week that it would exit the Web outsourcing business. Does that mean you should think about running your website in-house? Not necessarily.

As recently as a year ago, managed service providers (MSPs) seemed to be a pretty good bet. The idea behind them made sense: Instead of fronting a lot of money for servers, software, and data centers, you could just hand over those responsibilities to a company that specialized in such technology. The MSP would not only host your site but also maintain it, update it, and fix any glitches — all for a reasonable monthly fee.

Now, though, the biggest MSPs have been swallowed up and are divisions of larger companies, like EDS and IBM. The few remaining stand-alones are dying off or moving into other ventures. This week, MSP pioneer LoudCloud announced that it’s quitting the services market altogether. EDS will buy Loudcloud’s MSP business (comprising about 50 corporate clients) for $63.5 million.

Loudcloud is changing its name to Opsware and morphing into an enterprise software company, selling the systems-management and server code used in its own data centers. (EDS will be Opsware’s first customer, with a three-year, $50 million licensing contract.) And another MSP, the awkwardly named NOCpulse, has announced similar plans to begin selling the software it uses to run its business.

One reason these independents are disappearing is that they lack the credibility of a big technology company like EDS, a fact that even Loudcloud founder Marc Andreessen acknowledges. If a Fortune 500 company is going to trust someone with its website, it’s going to pick a big, reliable service provider that — barring accounting scandals or acts of terrorism — is likely to be in business for the next few years. After getting turned down again and again by large corporations that refused to hand over their Web operations to a small startup, Loudcloud decided to throw in the towel.

“We concluded that it would be far easier for someone who already has a track record to take that business and run with it,” Andreessen says.

But part of the demise of the independent MSPs also stems from the tough business climate right now. Everyone is looking to trim IT expenditures, and getting rid of recurring monthly fees (such as those paid to an MSP) is a fast way to make your budget look svelte. “Companies are looking at who they’re writing checks to,” says Corey Ferengul, vice president at the Meta Group. “Whether it’s cheaper or not, the perception is there that [hosting your own website] is cheaper, because you don’t have to write that check anymore.” Other companies already have hardware and data-center space to spare, thanks to the tech buildup of recent years, and they also have more confidence about managing their own Web infrastructures. Ergo, less outsourcing.

But does this mean you should bring your Web infrastructure in-house? Not necessarily. In fact, such a move may simply be signing on for costs — and headaches — that were once included in those monthly checks. “We believe it probably is still cheaper to go with an MSP in the long run, but some organizations are not doing complete cost capture,” Ferengul explains. In other words, they see one big item in the budget and don’t realize that cutting it only adds dozens of smaller ones elsewhere.

You can tell whether outsourcing makes sense only by looking at the total cost of owning and operating your website — including the cost of such variables as staffing, routine maintenance, data-center floor space, and even electrical power. It’s harder to make this calculation than it is to simply look at the size of a monthly check. But if you’re serious about cutting costs, it’s the only way to go.